technology, innovation and economic growth in britain
TRANSCRIPT
Copyright © 2012 by Tom Nicholas
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Technology, Innovation and Economic Growth in Britain Since 1870 Tom Nicholas
Working Paper
13-032 September 19, 2012
Technology, Innovation and Economic Growth in Britain Since 1870
[Prepared for the Cambridge Economic History of Modern Britain]
Tom Nicholas*
Harvard Business School
September, 2012
Abstract
This chapter examines technological change in Britain over the last 140 years. It analyzes the effects of patent laws and innovation prizes that were designed to promote technical progress. It explores the challenge associated with the changing organizational structure of innovation and the shift from independent invention to R&D activity taking place inside the boundaries of firms. And it also studies the development of British industrial science in universities and efforts to promote innovation through the formation of industry clusters. Overall, the evidence supports the traditional story of British failure in generating large payoffs from technological development. Although from the early 1970s Britain experienced a revival in the quality of innovation and improved productivity growth, structural weaknesses in the commercialization environment still remain.
* Soldiers Field Road, Boston, MA 02163, USA. [email protected]. I am very grateful to Steve Broadberry, David Chambers, Nick Crafts, Paul Johnson, Jonathan Michie, Avner Offer and conference participants at All Souls College, Oxford for many helpful comments and suggestions. I thank Teresa Amabile for providing funding via Harvard Business School’s Division of Research.
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1. Introduction
Economic growth can be driven in the short run by factor accumulation or by utilizing factors
more efficiently, but permanent increases can only result from technological innovation. Given
Britain’s loss of industrial preeminence from the late nineteenth century, an absence in new
technology formation is as natural an explanation for British failure as cultural interpretations
that emphasize a weakness of the industrial spirit (Weiner, 1981). While Britain was the first
“workshop of the world” its lagging position behind the technology frontier during the drive to
industrial maturity is a topic of some debate in economic history. Accounts of technological
progress during industrialization emphasize that Britain’s rise was defined by capabilities in a
broad array of industries and by a culturally enlightened and technically competent stock of
human capital that could translate new ideas from home, or abroad, into commercially viable
innovations (Mokyr, 1999, 2002, 2010). What changed the trajectory of technological change in
Britain from this high-point of early economic development?
This chapter examines the hypothesis that Britain has failed technologically. It provides a
statistical portrait of innovation over the last 140 years and it then focuses on three main areas of
explanation for Britain’s historical innovation performance. First, it analyzes incentives for
technological development, specifically British patent law and efforts to induce innovators using
inducement prizes as an alternative or complementary mechanism. Second, it explores the
organizational structure of innovation in Britain and R&D performance. Finally, it examines
public policy efforts to promote industrial science and innovation clusters.
The data strongly support the argument that Britain has historically been lackluster
technologically as other industrial nations began to catch up during the late nineteenth and early
twentieth century. Some of this decline was inevitable given that advancing countries, especially
the United States, had larger markets which promoted demand-induced innovation, larger
populations leading to a greater supply of human capital for invention, or deeper capital markets
to promote investment. But other aspects of decline were related to structural factors such as the
lack of competition in product markets and the relative absence of creative destruction as
disciplinary mechanisms to promote the efficiency of firms.
The data also reveal that Britain has experienced a renaissance in the quality of technological
development from the early 1970s. This is consistent with the hypothesis that this period
witnessed a positive change in the growth rate of productivity and the end of Britain’s relative
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economic decline (Crafts, 2012). However, recent advances in productivity did not lead to
performance gaps in the ability to manage innovation being fully overcome. In fact, managerial
failures in small and large firms still act as a barrier to the widespread adoption of best-practice
techniques (Bloom and Van Reenen, 2007; Bloom, Sadun and Van Reenen, 2012). Although
Britain has a long tradition of excellence in the production of scientific knowledge, factors like
weak management have stifled the rate at which new innovations have been commercialized.
2. Measuring Technological Change
A. Productivity Statistics
It is well-established in growth models that innovation is a main engine of economic
development, but despite a glut of research in the area, technological change is still difficult to
measure empirically. In growth accounting, the Solow residual is a measure of (among other
things) technological progress, but as Abramovitz (1956, p.11) famously put it, it is really a
“measure of our ignorance” and even more so if the inputs into TFP calculations are measured
with error, as they tend to be historically. Yet, with advances in data and methodology, it is
possible to make clear conclusions about Britain’s productivity performance. Britain was
outperformed by the United States and Germany during the early twentieth century; it fell behind
European countries during the “golden age” of economic growth between 1950 and 1973; but a
strong recovery occurred thereafter (Crafts, 2012). Because technology and productivity are
inextricably intertwined, this implies a strong recent innovation performance. Consequently it is
useful to analyze additional indicators to explore how productivity may be related to underlying
measures of technological change.
B. Patents and Patent Citations
Innovation surveys offer new insights into the boundaries between “technology” and
“innovation” and differences between product versus process innovation (e.g. Michie, 1998), but
they are only available systematically for recent years. Patent and R&D data, by contrast, are
more readily available over the long run and are commonly used as primary indicators of
technological change (Griliches, 1990). Figure 1 shows the number of patents per thousand of
population granted in Britain, the United States, Germany and France from the late nineteenth
century up to the present. Much of the change in British patenting, and indeed patenting in other
countries, can be explained by changes in patent laws. For example, the large drop in the number
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of patents granted in the late 1970s reflects more stringent novelty tests that were applied by the
British Patent Office under the 1977 Patents Act, which represented a first step towards
harmonizing patent standards across Europe. While the United States appears to have witnessed
an increase in patents per capita in recent years, especially relative to European countries,
measurement of this effect on a per capita basis is confounded by the fact that this period was
also associated with a rise in the number of patents granted in the United States to inventors from
overseas (Nicholas, 2011, p.801). Separating out domestic from foreign inventor patents, Khan
(2011, p.774) finds that patent per capita for domestic inventors were far higher in the early
twentieth century compared to at the end.
Figure 2 provides a more informative set of comparisons because it focuses on patenting
activity by inventors in a single country – the United States – where the effects of patent laws
remained largely the same for inventors from different countries. U.S. patent law required that
the first true inventor be listed on the patent document. Accordingly, the data reflect the
addresses of inventors residing overseas who were granted patents by the United States Patent
and Trademark Office between 1870 and 2005. British inventors accounted for the highest share
of foreign patentees up to 1900, but thereafter the share dropped and hovered at between 2 and 4
percent for the rest of the time period, with Britain’s trajectory from the early 1980s up to the
end of the period being closely synchronized with that of France. Noticeably, the share of patents
accounted for by German inventors was severely disrupted by the First and the Second World
Wars, but an equally pronounced feature of the data is the rise in the proportion of German
inventors patenting in the United States from the 1950s up to the 1980s, which is consistent with
a superior growth performance in this country induced by structural change during the “golden
age” of European economic growth (Temin, 2002). From the 1980s all the countries shown in
Figure 2 lost share as foreign inventors from countries such as Israel, Japan and Taiwan
increasingly patented their inventions in the United States. Based on these comparisons, Britain’s
patenting performance over the long run appears weak. In 2004 the British share of foreign
patents in the U.S. was 60 percent lower than it was in 1900.
Figure 3 shows the industry distribution of patents by the major time periods for inventions
patented by British, German and French inventors in the United States, along with the
distribution of patents by U.S. domiciled inventors. During the late nineteenth and early
twentieth century British inventors patented disproportionately in mechanical-related areas,
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perhaps reflecting expertise in equipment used in British industry as revealed in an important
study of the machine tools industry by Floud (1976). The relative dominance of patenting in
German chemicals stands out across all the time periods and mechanical patents are another area
of focus. France, like Britain, was heavily oriented towards mechanical patents prior to the First
World War and even more so during the interwar years. Interestingly, the shape distribution of
patents granted to British inventors is not dissimilar to that of patents granted to U.S. inventors
over time. In recent years much has been written about the significance of information and
communications technologies and the productivity benefits stemming from its interaction with
organizational capital. From 1974 to 2004 approximately 10 percent of patents granted to
inventors from the United States, Britain and France were in ICT.
But it is well-know that patents vary significantly by their quality and therefore insights
based on raw patent counts, or their industry distribution, can be misleading. Even if inventors
patented their best technologies in the United States, it is still possible that the quality of the
inventions in the data in Figures 2 and 3 varied. A solution to this problem is to use citations that
patents receive in subsequent patents granted as a measure of their technological significance
(Trajtenberg, 1990; Nicholas, 2005) and then compare patents by citation frequency across
inventors from different countries. U.S. patent law requires that all prior art (i.e., the knowledge
on which the invention builds) is disclosed and this has been systematically recorded on patent
documents in the form of patent citations going back to 1947. This method can be used to
determine how highly cited were the U.S. patents of British inventors relative to otherwise
equivalent patents granted in the U.S. to inventors from other countries.
Table 1 reports estimates of patent citation regressions, which take the following form where
i indexes an individual patent, j a inventor’s county, k a technology category and t a year:
.YEARTECHNOLOGYCOUNTRY)CITS1(log tkji
Given the skewed nature of citations, the dependent variable is the natural logarithm of a count
of patent citations to each patent granted in year t in all patents granted in the United States
between 1947 and 2008. One is added to the citation count to rescale zero values to facilitate the
log-transformation. This variable is regressed on a set of country dummies, with Britain as a
baseline category. Technology dummies based on the United States Patent Office classification
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scheme, as developed by Hall, Jaffe and Trajtenberg (2002), are included because citations may
reflect industry or factor endowment driven biases in the distribution of patents or citations. Year
dummies control for time effects because earlier patents receive more citations ceteris paribus
than later patents. Regressions are run using data on inventors from all countries that patented
10,000 or more inventions in the United States between 1870 and 2004. The data consist of 1.74
million patents from inventors residing in 17 countries.
Because countries enter into the data over time, it makes the most sense to examine patent
citations during four separate sub-periods: up to the First World War (1870-1918); the interwar
years (1919-1945); the Second World War and post-war years (1946-1973); and the period
associated with the end of Britain’s relative economic decline (1974-2004). The regressions are
run in semi-logarithmic form so the coefficients measure the percentage change (exp[ BRj ]-
1×100) in citations to patent i granted in the United States to an inventor in country j relative to
citations to patents by British inventors who also patented there.
Results in Table 1 for the period between 1870 to 1918 show that patents by British inventors
tended to be, in relative terms, of a lower average quality. On a patent citations basis, inventors
from Britain underperformed inventors from most countries in Europe, although it is important to
note that in absolute terms the number of patents granted to British inventors was also much
higher (Figure 2). During the interwar years, however, the share of patents granted in the United
States to German inventors increased significantly (Figure 2) and the average quality of these
inventions was also higher. Furthermore, at this time, patents by French inventors had
approximately 4 percent higher citations than patents by British inventors. During the “golden
age” of European economic growth, citations to patents by British inventors still slightly lagged
average citations to patents by German inventors, but note that British inventors outperformed
inventors from 8 out of the 13 countries on a citations basis from 1946 to 1973. Between 1974
and 2004 British inventors outperformed inventors from 13 out of 16 countries, including
Germany, with only patents to inventors from Canada, Israel and Japan receiving significantly
higher citations.1 While this evidence suggests that from the early 1970s Britain experienced a
relative increase in the quality of innovation, it is also worth pointing out that this coincided with
1 Intellectual spillovers tend to be localized geographically. Hence it would be expected that the inventions of Canadian inventors would be highly cited by patents granted in the United States. The citation premium to inventors from Israel and Japan, on the other hand, is less likely to be confounded by the effect of geography and more likely to be consistent with their technological superiority.
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a drop in the relative share of inventions by British inventors patented in the United States
(Figure 2). In other words, the data suggest that the quality, but not the quantity, of patents was
improving.
C. R&D Investment and Human Capital
Patents are an outcome measure of innovation whereas R&D is an input measure that informs
our understanding of the scale of the resources devoted to technological change. Historical
statistics on R&D are limited, but the scant data that are available suggest that at the turn of the
twentieth century Britain was spending about 0.03 percent of GDP on R&D (Edgerton, 1996,
p.32) and over time this share increased significantly as the complexity and capital requirements
for innovation increased. During the 1990s Britain was spending about 2 percent of GDP on
R&D and the share currently stands at approximately 1.8 percent.
Yet, the history of R&D investment in Britain is typically a story of underinvestment, or
underperformance (or both) relative to international standards. Figure 4 shows that during the
1930s R&D output was less than half the level in the United States and a large gap between the
two countries persists for all of the snapshot years, whether using net output or value added as
denominators. While Britain looks better when using Germany as a benchmark, it seems
reasonable to assume that Germany was far more productive per unit of R&D input, especially
between 1945 and 1970 when the output from Britain’s research effort was relatively weak
(Horrocks, 1999). Data on research employment in Figure 5 show Britain in a more favorable
light to Germany and the United States. But while the level and the quality of British human
capital in R&D has always been high, firms have traditionally been weak at translating this
knowledge into productivity performance (Nickell and Van Reenen, 2001).
It is clear from the statistics, and the historical evidence more generally, that over the long
run competing countries had a much stronger tradition of productive R&D than did Britain. In
Germany the exemplar case is knowledge and complementary capabilities in the chemicals
industry (Murmann, 2003). Firms such as Badische Anilinund-Soda-Fabrik (BASF) and Bayer
devoted large capital resources to R&D and to incentive mechanisms so that scientists developed
the most appropriate types of new technical knowledge (Burhop and Lübbers, 2009). In the
United States interactions between technology and organization led to the institutionalization of
R&D (Mowery and Rosenberg, 1989). During the interwar period, Britain lagged even further
behind Germany and the United States, as both countries heavily invested in industrial
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development. In the United States in-house R&D developed extensively as firms like General
Electric, Eastman Kodak and Du Pont took basic and applied science seriously, leading to
numerous breakthrough innovations such as electrical appliances, motion picture cameras and
products like neoprene (Mowery and Rosenberg, 1989).
Although during the post-Second World War period, aggregate statistics suggest that Britain
was devoting a large share of GDP to R&D this was unobservable in the growth statistics. One
explanation would be scale effects, whereby higher levels of aggregate R&D investment in
countries like the United States had a larger impact because externalities, which magnify the
impact of innovation, grow with the size of the economy. Jones (1995), however, rejects the
hypothesis of scale effects given that the number of scientists and engineers engaged in R&D in
OECD countries increased substantially from the 1950s without a simultaneous boost to
economic growth rates. Moreover, since the 1970s it is reasonable to assume that the effect of
scale would not have shifted dramatically in Britain relative to other competing nations and yet
British R&D has been particularly productive (Crafts, 2012). This implies factors other than
scale may have been more influential determinants of British R&D performance.
3. Patent Laws, and Incentives
A. Patents
Among all the explanations for Britain’s lackluster performance in the technical sphere
patent laws should, on the face of it, be a good candidate. It is well-established that the
institutional environment in which inventors and firms operate can powerfully influence both the
rate and direction of technological change (Lerner and Stern, 2012). Patents provide a short run
monopoly over the right to use an invention in order to compensate inventors for the expense
incurred to develop the invention. Publication of the idea and codification of the underlying
knowledge in a patent document is meant to encourage the diffusion of new ideas across
inventors. British patent laws have traditionally been criticized for being expensive and
cumbersome. In 1875 it was 19 times more expensive to hold a patent to full term in Britain than
it was in the United States (Lerner, 2000).
According to one dominant theme in the literature, innovation in the United States flourished
during the process of industrialization because patent laws provided cheap democratic access to
intellectual property rights, whereas in Britain the high cost of obtaining a patent may have
curtailed technological progress (Khan, 2005). On one level this argument is compelling because
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inventors in the United States were both able to access cheap patents and interact with
intermediaries who created a market for ideas (Lamoreaux and Sokoloff, 1999, 2002). A
challenge to the importance of patent laws in this account is that across countries the historical
evidence shows changes in patent laws do not predict changes in innovation. Using data on
patent reforms for 60 nations from 1850 to 1999, Lerner (2009) even finds a negative effect of
reforms on subsequent patenting. He concludes that “the impact of strengthened patent
protection may simply be far less on innovative activities than much of the economics and policy
literature assumes” (p. 348).
More detailed evidence from a major patent reform in Britain also questions the significance
of patent laws as a lever for innovation (Nicholas, 2011). The 1883 Patents Act represents one of
the most significant reforms in patent law history as filing fees were reduced by 84 percent. The
Act was passed against a long debate in European countries over the use of patents and whether
knowledge should even be patentable (Machlup and Penrose, 1950), and in the late nineteenth
century inventors in Britain protested that most governments in Europe and certainly the United
States charged far less for patent protection. The most significant change associated with 1883
Patents Act was the substantial reduction in fees, although other administrative changes were
also made such as the use of examiners to facilitate the patenting process. At the same time,
Britain also ratified the Paris Convention for the Protection of Industrial Property, thereby
providing full patent rights to foreign inventors from the signatory countries.
Despite the significance of the 1883 reform there is little evidence that it led to a shift in
innovation. Although the number of patents granted increased by a factor of 2.5, there was not a
step jump in the quality of technological development. In fact, while the propensity to patent
increased as inventive activity migrated from outside to inside the patent system, the inventions
that were patented were more likely to be those in the lower end of the patent value distribution.
Moreover, for an event window around the 1883 reform, citations to patents by British inventors
patenting in the United States did not increase after the reform relative to before. This suggests a
limited role for British patent laws in inducing innovation.
After the 1883 Patents Act, British patent law grappled with the issue of how to balance the
tradeoff between providing inventors with temporary monopolies and the public desire to limit
the deadweight loss arising from inventors earning supernormal returns. In their influential
assessment of the patent system, Boehm and Silberston (1967) argued that the balance was only
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partially resolved. They recommended replacing the fixed patent term (16 years when they were
writing) with a flexible term based on patent extension principles, and they also suggested
changing the scope of patent rights to take account of the relative merits of different inventions.
These types of ideas form the basis of a large literature on the economics of patents, but they
have not been implemented in policy, a problem that is often compounded by patent office
mismanagement (Jaffe and Lerner, 2004). Furthermore, while patents have typically done a good
job of protecting the rights of inventors (or at least those who are willing to defend their rights in
the courts), they have done much less to achieve their second goal of diffusing knowledge across
innovators. In the absence of strong incentives to share knowledge in a context where technology
diffusion is a critical driver of economic growth, it is perhaps no surprise that patent laws have
been largely indeterminate of the rate of technological change.
B. Prizes
Patents are a dominant mechanism for incentivizing inventors, but it is important to note that
throughout British history alternative mechanisms have also been used. Science has long had a
prominent place in British culture and the economy going back to the archetypal institutions that
promoted learning during industrialization. By 1850 there were 1,020 scientific societies or
associations in Britain with approximately 200,000 members (Mokyr, 2002, pp. 43-45, 66) and
these helped to create an “enlightened economy” that was conducive to rapid technological
progress. These institutions encouraged spillovers of technological knowledge in an environment
where technical and practical knowledge was not only highly valued but also enthusiastically
disseminated (Mokyr, 2010). To this end, scientific societies also used prizes in order to spur
innovation where inventors could also protect their inventions using patents.
The basic theory behind prizes is long-standing. Polanvyi (1943) suggests that “[i]n order
that inventions may be used freely by all, we must relieve inventors of the necessity of earning
their rewards commercially and must grant them instead the right to be rewarded from the public
purse.” In a more recent theoretical contribution, Kremer’s (1998) government funded patent-
buyout mechanism establishes a price for the invention using a sealed bid auction, where the
bidders have some small probability of winning the right to use the invention. If a bidder wins
then the inventor receives a “prize” payment equivalent to the bid price plus some markup to
reflect the social value of the invention. Otherwise the government pays the same amount to the
inventor and it then owns the invention and places it in the public domain. The attractive
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property of the mechanism is that it avoids the deadweight loss associated with patents, but it
does not need to replace the patent system altogether. Rather, it can be used to provide prize-
based incentives in areas that have a particular appeal from the perspective of welfare. This type
of intuition was behind the famous 1714 prize offered by the British government for an
instrument measuring longitude (Sobel, 1996). It also applied in the acquisition of the
Daguerreotype photography patent by the French government from Louis Jacques Mande
Daguerre, and his partner. With public ownership of the patent, and therefore the underlying
knowledge behind the invention, Daguerreotype photography diffused rapidly (Kremer, 1998).
The fact that prizes have worked to simulate invention is evident from a study by Brunt,
Lerner and Nicholas (2010), which examines almost a century of data on prize competitions held
annually by the Royal Agricultural Society of England (RASE). The RASE used medals and
monetary prizes to spur technological development, sometimes in areas where British inventors
lagged behind foreign competition, such as harvesting technology. Prizes were offered and
awarded in these areas to promote innovation and medals in particular were effective at
increasing the number of entrants into competition and both the number and the quality of
patents. Furthermore, this boost to innovation did not come from substitution effects arising from
inventors reallocating from non-prize areas to prizes areas. Instead, the overall level of aggregate
innovation increased. This evidence shows the utility of British institutions of science in
establishing pioneering mechanisms for promoting innovation. Of course, technology must
interact with organization to create productivity improvements, and it is in the management and
commercialization of new ideas that the British economy has been historically lacking.
4. The Organization of Invention and Managing R&D
A. Independent Inventors
The tension between Britain’s capacity for developing new ideas, but its relative inability to
implement them successfully is evident from the careers of pivotal independent inventors. An
often overlooked fact, given the large literature on the rise of the corporation, is that a significant
share of innovative activity in Britain, and indeed other countries, during the late nineteenth and
early twentieth century occurred outside the boundaries of firms. By 1930, approximately half of
all patents in Britain, the United States and Japan were granted to independent inventors.
Moreover, the average quality of these inventions was high (Nicholas, 2011).
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Macleod’s (2008) analysis of British culture from 1750 to 1914 shows that independents had
a particularly prominent profile in cultural discourse going back to individuals like the steam
engine pioneer, James Watt (1736-1819), who were celebrated for their creativity. Although their
popularity in society diminished after the First World War, there is every bit as much evidence to
suggest that they still mattered economically. In their extensive study of independents entitled
The Sources of Invention, Jewkes, Sawers and Stillerman’s (1958) conclude:
The evidence of the continued survival of the individual inventor is simply that many men who have lived this century – numbers of whom are still, or were until recently, alive – fall into this category and by their genius have added enormously to the stock of useful ideas and to standards of living. (p.84)
In order to explain why these types of inventors developed such path-breaking innovations
that changed everyday life, Jewkes, Sawers and Stillerman contend that “if invention ever
became the prerogative of full-time professional employees, there are grounds for believing that
it would be weakened in range, liveliness and fertility” (p.96). The purview of independent
inventors was the pursuit of the unorthodox and the search for new ideas derived from original
thinking. They could be more creative by being liberated from tradition, the boundaries of what
was already known, or from what Joseph Schumpeter (1950) described as “routinization”.
Jewkes, Sawers and Stillerman’s assessment is based on the role of individuals such as
Sidney G. Brown (1873-1948) who acquired 235 patents in his lifetime for inventions in the area
of electrical engineering, the first of which he filed in 1899. Brown’s career was typical of many
independents in that he was motivated by the psychic rewards from discovery and only then by
commercialization. Despite starting up a firm to facilitate commercialization of his inventions,
expensive patent litigation meant that he made virtually no money from his most celebrated
invention – the gyro-compass, a navigational device for determining geographical direction.
Frederick W. Lanchester (1868-1946) was granted almost twice as many patents as Brown, and
became a pioneer in aerodynamics and automotive engineering. Yet, although he acted as a
consultant to B.S.A. motors and Daimler, his financial payoffs from invention were limited.
In many instances independents could neither commercialize themselves nor sell on their
inventions to third parties and this has long been considered to be an inherently British problem.
New technologies, by their very nature, are disruptive and are subject to commercial uncertainty,
which may lead to technology trade working imperfectly (Arora and Gambardella, 2010). A
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well-known case is Frank J. Whittle (1907-96) who applied to the British patent office for
protection on a turbo-jet engine in 1930, an invention which became one of the most significant
discoveries of the twentieth century (Whittle, 1945). But when Whittle notified officials at the
British Air Ministry of his idea and patent they rejected it as being infeasible and so did several
private corporate entities. Eleven years later a prototype aircraft using a Whittle-style engine
produced 800 pounds of thrust, reached 466 miles per hour and an elevation of 42,000 feet, far
beyond anything that had been achieved prior to this point in time. Because of technology
uncertainty and poor commercialization, the jet aircraft age was delayed.
On the other hand, payoffs could be achieved, both for inventors and society, by interactions
between independents as sources of new ideas and firms that were in a position to
commercialize. In the United States firms monitored the market for technology and there is
strong evidence to suggest that this led to a division of labor in invention as firms selected
complementary inventions from independents operating outside their formal R&D environments
(Nicholas, 2009). There is also some evidence of this type of exchange in Britain, in contrast to
the market failures mentioned above. For example, Cadbury, the confectionary manufacturer
maintained a register of outside inventions. More generally, there was scope for the coexistence
of independents and firms because they generally focused on different fields of technological
development. That complementarity, plus the presence of intermediaries who could facilitate the
sale of patents, meant that independents could play a crucially important role in the process of
technological change even as the corporate economy developed (Nicholas, 2011).
B. Industrial Research and Management Practices
As technological progress depended on larger capital requirements, R&D inside the
boundaries of firms became more important over time. The first corporate research laboratory is
conventionally traced to 1868 when BASF opened a facility in Ludwigshafen, Germany. This lab
was most prominently directed by Heinrich Caro, a leading chemist who synthesized the first
indigo dye. Despite being a disorganized, idiosyncratic figure with a reputation for being a
difficult collaborator, the in-house facility that Caro directed became a focal point of
technological development in the German synthetic dyestuffs industry. Caro’s path breaking
innovations acted as a catalyst to the industrialization of chemistry. By hiring academically
trained chemists and through links with noted professors in the field such as August Wilhelm
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Hofmann from the University of Berlin and Adolf von Baeyer who won the Nobel Prize for
chemistry in 1905, BASF created an auspicious foundation for the commercialization of basic
scientific discoveries that became widely replicated in the industry (Murmann, 2003).
Mowery and Rosenberg (1989, pp.38-39) date the origins of industrial research in the U.S. to
an 1863 facility in Wyandotte, Michigan that investigated the chemistry of Bessemer steel
making, while prominent examples of corporate labs include those founded by Thomas Edison in
Menlo Park, and Alexander Graham Bell in Boston, both in 1876. However, it was not until the
early twentieth century that in-house R&D facilities assumed a prominence seen in the German
dyestuffs industry. By the early 1900s the corporate sector had developed on such a scale that
vertical integration and managerial hierarchies were necessary for the efficient functioning of
American business (Chandler, 1990). Innovation was brought increasingly within enterprises
because the market was no longer able to organize transactions to achieve efficient outcomes. By
1920 the National Research Council had noted a widespread demand for information on in-house
research, and it conducted regular surveys of industrial establishments. Data from these surveys
show that the number of scientists and engineers employed in industrial research laboratories
grew at a rapid rate. Numbers more than doubled between 1921 and 1927 from 2,775 per 1,000
production workers to 6,274 (Mowery and Rosenberg, 1998, pp.21-22).
In an important study, Edgerton and Horrocks (1994) document the early history of R&D in
Britain. They maintain that British firms invested quite heavily in in-house R&D, especially in
the chemicals industry. Networks of technical experts facilitated spillovers of technological
knowledge which were also promoted by inter-firm linkages. An early contributor to the British
R&D effort was United Alkali which had centralized R&D as early as 1892. Firms like ICI
(formed in 1926 as a merger of United Alkali and three other chemicals companies), GEC and
Metropolitan-Vickers were R&D pioneers, a point noted in Hannah’s (1976) work on the rise of
the corporate economy. Edgerton and Horrocks’ revisionist evidence represents a counter to
Mowery’s (1986) traditional argument that British R&D was weak and Chandler’s (1990)
implicit assertions that British firms also failed to generate large returns from R&D because they
underinvested in the complementary capabilities of production, distribution and management.
In line with the revisionist view, there is anecdotal evidence to show that British R&D could
be innovative and well-managed. Barker’s (1977) study shows how Pilkington developed the
Float Process after extensive R&D over a decade, which was facilitated by family ownership and
15
control of the company and a commitment by the company to harnessing applied science and
technology. Another prominent example of British success is the pharmaceuticals and biologics
industry, where Glaxo-Wellcome, Smithkline-Beecham (these two companies merged in 2000 to
form GlaxoSmithKline) and AstraZeneca have created a portfolio of some of the world’s best
known drug innovations such as Tagamet, Zantac and Nexium for the treatment of
gastrointestinal problems. Equally there is anecdotal evidence of British R&D failure. Notably
the British inventor Geoffrey Hounsfield, a scientist employed at the Central Research
Laboratories of EMI, developed the profoundly significant CT Scanner, but EMI did not have the
managerial capabilities to keep pace with demand. During the 1970s and 1980s it lost out to
organizationally efficient U.S. companies like Technicare and General Electric.
Beyond individual case studies, Broadberry and Crafts (1992) argue that a critical set of
drivers of firm performance are related to industry structure and the operating environment more
generally, and these in turn influence incentives and management capabilities. For example, the
British regulatory environment during the interwar years tolerated collusion between firms and
provided subsidies for incumbents, so competition was absent as a disciplinary device in product
markets. Furthermore, labor unions created an unproductive bargaining situation and constrained
the reallocation of resources from poorly to better performing firms, which had a strongly
depressing effect on productivity. It is well-known that if managers of incumbent firms do not
face the threat of replacement then their preferences can tend towards the Hicksian “quiet life”.
On the other hand, competition can encourage innovation especially if firms are already close to
the technological frontier. In this case, firms have more incentives to invest in R&D to capture
the incremental profits deriving from innovating (Bloom et. al., 2005).
The notion that such factors were influential in Britain’s more recent innovation performance
is evidenced by the uptick in productivity as a consequence of more favorable competitive
dynamics in British business. Deregulation, the liberalization of capital markets, better industrial
relations standards and the strengthening of legislation with respect to product market
competition all had positive effects (Crafts, 2012). At the same time, it is worth noting British
weaknesses in the management and diffusion of technology still persist. Insofar as the main
determinants of rapid TFP advance are the diffusion of innovations and the effectiveness of
factors that affect the efficiency with which new technologies are used (Comin and Hobijn,
2010), the evidence suggests a large gap exists between Britain and the United States. Bloom and
16
Van Reenen (2007) find that competition in recent years is still relatively milder in Britain than
in the United States and when combined with the preponderance of British family firms, this has
led to a prominent and persistent tail of badly managed medium-sized firms. Among larger firms,
Bloom, Sadun and Van Reenen (2011) find that U.S. multinationals operating in Europe were far
more able to benefit from technology diffusion as manifested in the implementation of ICT
advances compared to otherwise equivalent European firms. Weaker diffusion and inept
management practice capabilities help to explain performance defects, although in a Europe-
wide context, these are not uniquely British problems.
5. Efforts to Promote Science and Agglomeration
A. Science and Scientific Education
Another important set of influences on the determination of technological progress are public
policy towards the promotion of basic science and education in technical capabilities. Scientific
knowledge changed radically over time from the science of elementary mechanics during the
Industrial Revolution to breakthroughs like complex polymer science that set the foundations for
the Second Industrial Revolution. From electricity generation to nuclear power the growth of
knowledge has been a defining characteristic of the modern world (David, 1990; Mokyr, 2002).
Scientific and technical breakthroughs are critical inputs on the supply side. Where a
fundamental connection exists between science and the growth of technology and invention,
these inputs can be powerful drivers of the rate of economic development.
It has often been argued that Britain fostered high social status education institutions that
were inimical to technological progress, with the traditional “cultural critique” suggesting that
Britain did a good job of training gentlemen and not “practical men” (Wiener, 1981). By
contrast, technical education was prioritized under the French education system as exemplified
by the École Polytechnique in Paris, one of the most significant technical schools. It was also
said to have been a priority in Germany where the integration of science and practice led to a
productive type of knowledge. Summarizing this literature on Britain’s education shortcomings,
Edgerton (1996, p.19) quips “[s]cience is red-brick, not Oxbridge; it is Manchester not London;
it is Harold Wilson and not Harold Macmillan; it is, furthermore, politically radical rather than
conservative”. With respect to science, Britain has always been culturally antithetical.
The alleged weaknesses of British education has been challenged by Sanderson (1988) who
shows that scientific and technical instruction improved radically in Britain during the late
17
nineteenth century, even at the high-prestige institutions. At Oxford and Cambridge, the number
of students graduating annually in science and technical fields increased by more than one third
between 1900 and 1914 (Edgerton, 1996, p.20). Moreover, the London and civic universities had
never subordinated technical and scientific instruction to the classics. And, Berghoff and
Möller’s (1994) analysis prominently indicates that despite the alleged bias of the German
education system to practice, the majority of German businessmen between 1870 and 1914 had
actually received a classical education at a prestigious Gymnasium.
The data indicate a significant expansion over time in scientific education in Britain with
noticeable growth after the Second World War. By the late 1920s, 30 percent of university
students in Britain received a scientific or technical education rising to 52 percent during the late
1960s (Edgerton, 1996, p.22). The richness and importance of the science base has led to major
breakthroughs. The 1953 DNA discovery by Francis Crick and James Watson at the Cavendish
Laboratory at Cambridge University laid the foundation for the development of the bio-
technology industry and furthermore there is general evidence of a disproportionately positive
British influence on science. By the late twentieth century Britain produced 8 percent of the
world’s scientific research papers, yet it accounted for only about 1 percent of the world’s
population (Nickell and Van Reenen, 2001).
Britain’s capabilities in science are evidenced in the developments associated with the
Second World War and its geopolitical aftermath. Given that up to at least the 1960s
approximately a quarter of R&D investment came from government-financed defense
expenditure, the Cold War played an important role in the development of the British science
base. Aviation, electronics and nuclear capabilities all received heavy levels of investment. In
1954 the Atomic Energy Authority was established with a view to managing the R&D process
and creating collaborations and spillovers into private industry. And as Agar (2003, p. 352)
points out “[w]ithout the Second World War the history of computing would have been radically
different”. The need to process and decipher large amounts of data for reasons of national
security, led to an extensive research program. This culminated in the first programmable
computer – “Collosus” – built at the Post Office Research Laboratory in North London, which
was then used for code breaking at Bletchley Park.
Because Collosus was destroyed after the war, and the tacit knowledge cloaked in secrecy, it
was not until the 1950s that Britain developed a computer mainframe industry. Hendry (1990)
18
describes the formation of the National Research Development Corporation in 1949 as an
institutional mechanism for government funded support of R&D efforts and a number of new
computer manufacturers emerged such as International Computers and Tabulators, which later
became ICL. But as the industry migrated to personal computers, Britain’s main computer
manufacturers – Acorn, Amstrad and Sinclair – enjoyed a limited period of success. And on the
mainframe side the industry was soon surpassed by American manufacturers, specifically IBM.
Furthermore, a new wave of semiconductor and micro-processing startups in Silicon Valley
captured market share on the component manufacturing side. Britain’s inability to compete in
this area was an entrepreneurial problem that reflected a weakness at the intersection of science
and technology. It was also caused by a lack of competition and new entry and the absence of
creative destruction that was so dominant a force in the U.S. computer industry.
B. Clusters
Policy makers frequently cite Silicon Valley or clusters in Germany as optimal ecosystems
for generating sustainable competitive advantage. Clusters have institutions and culture,
industrial structure and corporate organizations that promote innovation and economic
development (Saxanian, 1996). The idea that agglomeration creates positive externalities is a
fundamental proposition in urban economics (Porter, 1990; Krugman, 1991), and the idea goes
back to Alfred Marshall’s famous quote in the Principles of Economics:
The mysteries of the trade become no mysteries; but are as it were in the air, and children learn many of them unconsciously. Good work is rightly appreciated, inventions and improvements in machinery, in processes and the general organization of the business have their merits promptly discussed: if one man starts a new idea, it is taken up by others and combined with suggestions of their own; and thus it becomes the source of further new ideas (1890), p.271.
Marshall’s insights have formed the basis of a large literature. Industry clustering it is
commonly observed and yet it typically cannot be explained by exogenously determined natural
advantages like resource endowments that would also lead to a close proximity between firms. In
addition to the “mysteries of the trade” argument, which is essentially about social interactions
spurring innovation spillovers, Marshall also recognized that clusters could be driven by a desire
to save on transport costs between input suppliers and manufacturers or by firms and workers
wanting to benefit from a pooled labor market.
19
Historical evidence provides a link between clusters and technology. Knowledge flows
through informal contacts play a role in Allen’s (1983) account of collective invention in the
Cleveland blast furnace industry during industrialization where producers established the best
height for the furnace through a process of information exchange. These mechanisms operated in
steam technology according to Nuvolari’s (2004) account of Cornish mining. Leunig’s (2003)
work shows that Lancashire cotton manufacturers were heavily clustered. In Blackburn, the
average spinning mill had 7 weaving mills within 300 yards, and 28 within half a mile. Leunig
contends that prior to 1914 Lancashire had high levels of human capital based on learning by
doing, and world leading productivity. This contrasts with the traditional story of British
backwardness and highlights how firms could efficiently operate in a vertically specialized
setting characterized by the kind of strong external economies envisaged by Marshall.
The location of inventive activity informs our understanding about regional comparative
advantage. Using patent data Cantwell and Spadavecchia (2011) investigate the regional
concentration of inventive activity during the interwar years based on the locations of British
inventors who patented over 8,000 inventions in the United States. They find a dominant spatial
role for the South East, especially Greater London, which alone accounted for over 40 percent of
all patents with the next largest regions in terms of patenting – the North West and the West
Midlands falling some way behind. But while the London area has been an important center of
inventive activity, it is not clear that innovation has been caused by cluster-based advantages. In
fact, using an extensive 1996 survey of London businesses and examining inter-firm linkages
and the geography of innovation, Gordon and McCann (2005) find “that the importance of
specifically local informal information spillovers for successful innovation is very much more
limited than has been suggested.”
The absence of strong and sustainable agglomeration effects on a scale witnessed in Silicon
Valley or in the industrial clusters in Germany can be illustrated with reference to Britain’s best
known cluster of Cambridge technology firms, or “Silicon Fen”. Drawing on a strong university
science base in scientific instruments, ICT and biotechnology, the number of firms there
increased from 50 during the mid-1960s to more than 1,200 firms that employed 36,000 workers
by the year 2000 (Garnsey and Heffernan, 2005). At the height of the ICT boom during the late
1990s, high tech firms in Cambridge had a combined turnover in excess of £3.5 billion, with a
large number of acquisitions fuelling investment in entrepreneurship and new technology
20
formation. Cambridge benefitted from government policy initiatives such as the 1998 University
Challenge Fund, which established seed funding for turning scientific knowledge into
commercial innovations. However, Drofiak and Garnsey (2009) show that the recent
performance of the Cambridge cluster is less favorable, as fewer enterprises have received
venture funding and firm survival rates have shortened. More generally, agglomeration effects
may be more limited under policies designed to generate new innovation clusters in places
characterized by old declining industries, especially if there is a mismatch between labor market
pools. Relative to Silicon Valley, Britain has not created global innovation giants through cluster
initiatives (perhaps with the exception of Silicon Fen’s ARM Holdings a leader in mobile phone
chip technology), which casts doubt on the long run success of British efforts designed to induce
positive agglomeration externalities.
6. Conclusion
This chapter has surveyed the literature on technological development in Britain over the last
140 years in an effort to highlight major trends in the data and main patterns of causation.
Technology is central to the growth process, and therefore the history of innovation should
provide insights into why Britain lost its nineteenth century position as the dominant industrial
nation and why Britain’s decline up to the early 1970s was so relentless. To the extent that
innovation and the diffusion of useful knowledge are main drivers of economic growth (Romer,
1990; Mokyr, 2002), an underlying hypothesis throughout this chapter has been that Britain’s
problem was fundamentally related to deficiencies in technology.
To be clear, Britain has not failed when considering the function of invention. Rather, Britain
has a long tradition of excellence in invention and in basic science. The pioneer inventors during
the era of industrialization were followed by path-breaking contributions to technological
progress by both independent inventors and by corporations that pushed out the frontier of
technological progress. The gyro-compass, jet engine, and the float glass process all stand out as
examples of British success. Lancashire was a preeminent source of technological knowledge in
cotton textile machinery, and the diffusion of this knowledge facilitated the growth of competing
industries in the United States and Japan (Jeremy, 1981; Singleton, 1997). British academics
discovered DNA, invented the CT Scanner and Tim Berners-Lee, a British computer scientist, is
credited with the idea for the World Wide Web.
21
Furthermore, institutional mechanisms to support invention have flourished in Britain.
Although the country’s patent laws have been criticized because they were expensive and
awkward to administer, this may not have represented a major drag on innovation, as historical
evidence suggests that British (and indeed American) inventors did not frequently use patents to
protect their intellectual property rights (Moser, 2005). Moreover, when patents did become
cheaper – as indicated by the large drop in fees following the 1883 Patents Act – the propensity
to patent increased, but very little else changed (Nicholas, 2011). Outside the patent system,
British scientific societies contributed to the diffusion of knowledge during industrialization and
they were frequently pioneers in using alternative or complementary mechanisms to incentivize
inventors. From the early nineteenth century, the Royal Agricultural Society of England used
inducement prizes to promote technological progress, and such exemplar historical cases are
particularly relevant as policy makers in recent years have focused attention on the optimal
design of public policies to promote innovation (Brunt, Lerner and Nicholas, 2012).
Despite these areas in which Britain displayed competence and distinctiveness, the
management of technology has typically been weak. Organizational economists have long
argued that a strong complementarity exists between technology, management practices and the
demand for skilled labor, which creates a much more complex nexus through which invention
contributes to productivity growth. Moreover, the economic environment in which firms operate
is also central, including competition in product markets and the ecosystem to support R&D and
a capacity to harness inventions developed domestically or diffused from abroad. In all areas
Britain has failed to match the standards existing in the United States. Since the early 1970s
constraints on growth, such as regulations that previously undermined competition and prevented
reallocation to more efficient firms, have been progressively removed and there is strong
evidence to suggest that the quality of innovation has improved, especially relative to other
European countries. But, while the relentless phase of Britain’s relative economic decline is now
an artifact of the past, creating a foundation where technology continues to be an impetus to the
acceleration in productivity growth is still a pressing issue of the present and the future.
22
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Table 1. Estimates of Historical Patent Citations to Patents Granted to Foreign Inventors in the United States
Notes: Coefficients are from historical patent citation regressions described in the text. Coefficients in bold are statistically significant at the 5 percent level and measure the percentage change i.e. [exp(α)-1×100] in citations for patents to inventors from each country relative to the baseline category of citations to patents by British inventors. Citations counts are derived from patents granted in the United States from 1947 to 2008.
1870-1918 1919-1945 1946-1973 1974-2004
Austria 0.041 0.023 -0.019 -0.221Austrailia -0.006 0.027 0.063 -0.001Belgium 0.003 -0.075 -0.049 -0.060Canada -0.043 -0.040 0.054 0.117Switzerland 0.023 0.008 -0.013 -0.114Germany 0.024 0.030 0.010 -0.125Denmark 0.035 -0.016 0.002 -0.082Finland 0.103 -0.038 -0.040 -0.056France 0.039 0.042 -0.007 -0.129Israel 0.188Italy -0.013 -0.008 -0.057 -0.191Japan 0.026 -0.038 0.059 0.054Korea (South) -0.081Netherlands -0.031 0.025 -0.048 -0.110Sweden 0.030 -0.009 -0.082Taiwan -0.017
Base Category is British Patents
28
Figure 1. Patents Scaled by Population, 1870-2004
Notes: British and US patent data are from official statistics of each country’s Patent Office. German and French data provided courtesy of Diebolt and Pellier (2010). Population data are from Maddison (2009).
Figure 2. Percentage of United States Patents Granted to
British, German and French Inventors, 1870-2004
Notes: Data compiled by recording patent addresses of all patents granted in the United States from 1870 to 2004 and tabulating those British, German and French inventors.
0.0
0.2
0.4
0.6
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018
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US BR DE FR
0%
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BR DE FR
Figure 3. Technology Category Distribution of Patents Granted to Inventors Patenting in the United States
Notes: Data compiled by recording patent addresses of all patents granted in the United States from 1870 to 2004 and tabulating those British, German and French inventors. Patents were then categorized using the United States Patent Office scheme and then coded according to the categories used by Hall, Jaffe and Trajtenberg (2002). These are: 1=Chemicals; 2=Computers and Communications; 3=Drugs and Medical; 4=Electrical and Electronic; 5=Mechanical; 6=Miscellaneous.
01020304050
01020304050
01020304050
01020304050
1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6
1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6
1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6
1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6
DE, 1870-1918 DE, 1919-1945 DE, 1946-1973 DE, 1974-2004
FR, 1870-1918 FR, 1919-1945 FR, 1946-1973 FR, 1974-2004
GB, 1870-1918 GB, 1919-1945 GB, 1946-1973 GB, 1974-2004
US, 1870-1918 US, 1919-1945 US, 1946-1973 US, 1974-2004
Pe
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of P
ate
nts
Figure 4. Scaled R&D Expenditure in Manufacturing
Notes: Bars represent data for Britain and figures for comparison countries are given in the associated Table. Data are taken from Broadberry (2005), Table 8.14, p.122.
Figure 5. Scaled R&D Employment in Manufacturing
Notes: Percentage of manufacturing employment accounted for by “researchers”. Bars represent data for Britain and figures for comparison countries are given in the associated Table. Data are taken from Broadberry (2005), Table 8.15, p.124.
0.43 0.43
3.49
4.40
3.403.50
4.79 4.77
3.99
5.88 5.96
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
1934 1938 1959 1964 1968 1975 1983 1989
Per
cent
age
% Net Output % Value Added
% Net % ValueOutput Added
USA:
1937 0.98 1959 5.821981 5.96 7.681987 7.33 9.91
Germany:
1950 0.581959 1.401964 1.961969 3.081975 3.881983 5.72
0.03 0.05 0.07 0.07
0.57
2.69
2.42
3.663.55
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1933 1935 1938 1945-46 1959 1968 1975 1983 1989
Per
cent
age
% ResearchersUSA:
1933 0.17 1940 0.291946 0.32 1959 1.31
Germany:
1964 1.291969 1.701975 1.921989 3.29